Government-recognised startups can breathe easy about angel tax, say sources

The Centre is likely to announce in the coming week a blanket exemption from the controversial angel tax for government-recognised startups.

Entrepreneurs have reason to cheer as the government may soon announce a blanket exemption from angel tax to all startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT), sources in the industry who are in the know confirm to YourStory. The department, along with the Central Board of Direct Taxes (CBDT), will draw up a list of startups eligible for the exemption based on their audited financial statements, and income tax returns of the previous year. The Ministry of Commerce and Industry is likely to make the announcement regarding the exemption the coming week, the sources add.

The government will raise the tax eligibility for 10 years from the earlier seven, which means a startup can choose to pay tax for three years in any timeframe within the decade. Sources also said that the paid-up share capital limit for which a startup would be eligible for an exemption is now set at Rs 25 crore. If it exceeds Rs 25 crore, the firms would be eligible for exemption if investors can prove a net worth of Rs 2 crore or more in the previous financial year.

This comes as a relief to a lot of startups that received notices and orders from the Income Tax department demanding a 30.1 percent tax on investments they had raised in the previous years.

As the Indian startup ecosystem is booming and has raised close to $40 billion, the contentious Section 56 (2) (viib), which deals with angel tax, was a burden for founders, and the angel investors they raise funds from. Angel tax was introduced in 2012 only to track shell companies and their valuations, as income tax authorities were keen to stop the movement of black money. But startups took a beating as a result.

Now, with the impending government announcement regarding its exemption, the ecosystem and its stakeholders have cause to cheer, and bring more innovations in the new year without the worry of angel tax.

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